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Loan limits battle

By Polyana da Costa ·
Tuesday, July 19, 2011
Posted: 3 pm ET

The clock is ticking. In less than three months, Fannie, Freddie and Federal Housing Administration loans will get smaller.

But some lawmakers are poised to prevent the lower loan limits from going into effect on Oct. 1.

A bipartisan bill introduced last week seeks to keep the current loan limits for another two years. That would allow Fannie, Freddie and the FHA to continue to insure or buy mortgage loans worth up to $729,750 in some areas. Conforming loan limits vary by location. The highest limit is set to fall to $625,500.

If passed, the bill would "ensure that qualified homebuyers in this country continue to have access to the financing they need at a time when there are few alternatives," says Rep. John Campbell, R-Calif., co-author of the bill, titled Conforming Loan Limits Extension Act.

Many industry experts agree with the notion that lower loan limits will hurt the housing market. But others think it's time for the private market to jump back into the lending game and stop relying on government backing.

Robert Van Order, former chief economist at Freddie Mac and now a professor at George Washington University, co-authored a recent study that calls for even lower FHA loan limits.

The report claims that FHA’s current loan limits are much larger than necessary to serve its targeted market of first-time and low- to moderate-income borrowers.

An FHA limit of $350,000 in the high-cost markets and a limit of $200,000 in the lowest-cost markets is enough to satisfy FHA’s target constituency, according to the report.

FHA loan limits were revised in 2008 in response to the housing crisis and the lack of credit. Currently, the limits are about $271,050 in most markets but can go up to $729,750 in higher-cost markets.

Van Order says the loan limit reductions scheduled to take place in October will not be as disastrous as some in the industry have argued. In fact, he believes the limits should be reduced further, gradually, over a year or two.

"There has been a lot of overreaction by lenders," he says. "We don’t want to do anything that will move FHA down drastically, but it should be done at some point."

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Barak Volner
July 20, 2011 at 1:06 am

I'm going to agree with Bill Gross on his comment, "I'm a realistic observer or prognosticator that knows that they won't exist at some point," Gross said of Fannie and Freddie, "so why wait? It's just like a bad marriage. Do you string it out for five years and then get a divorce, or do you get a divorce almost immediately?"

Read more: Bill Gross on Fannie, Freddie |